THINGS THAT MAKE YOU GO Hmmm…

Hmmm…
THINGS THAT MAKE YOU GO
A walk around the fringes of finance
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““The anarch is (I am simplifying) on the side of gold: it
fascinates him, like everything that eludes society. Gold
has its own immeasurable might. It need only show itself,
and society with its law and order is in jeopardy.”
– ERNST JüNGER
“Gold was not selected arbitrarily by governments to be
the monetary standard. Gold had developed for many
centuries on the free market as the best money; as the
commodity providing the most stable and desirable
monetary medium.”
– Murray Rothbard
“The road to hell isn’t paved with gold, it’s paved with
faith. Faith in a dollar that’s backed by a belief that people have faith in other people’s belief in it.”
– Jarod Kintz
“Who knows?
Not me
I never lost control
You’re face, to face
With the man who sold the world”
– David Bowie, The Man Who Sold The World
02 June 2012
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2.
That $70,000 payment - which
in today’s inflation-decimated
dollars, would be worth roughly
$1,500,000 - secured the Homestake Deposit which would turn
out to be the largest and deepest
gold mine in North America, producing more than 40 million ounces of gold over its life until it was
finally closed in 2002.
In the middle
of South Dakota’s
Black Hills, near the Wyoming state line, lies the
tiny town of Deadwood (population – according
to the 2010 census, 1,270). Despite its evocative name, it’s probably fair to say that, without the recent eponymous HBO TV series, few
people would have even heard of a settlement
that, in the 1870s took its name from the dead
trees found in its gulch (yes, ‘gulch’). Amazingly
enough, despite its size, Deadwood is the county
seat of Lawrence County which is described thus
by the US Census Bureau:
“…the county has a total area of 800 square
miles, of which 800 square miles is land and 0
square miles is water”. Dead wood indeed.
A little more than two miles south-west of Deadwood lies another town of which few will have
heard; Lead (that’s ‘Lead’ as in ‘feed’ not ‘Lead’
as in ‘dead’), and Lead has a claim to fame all of
its own.
Lead was founded on July 10, 1876, after four
men; Fred and Moses Manuel, Alex Engh and
Hank Harney discovered a gold deposit that they
would sell the following year for $70,000 to a trio
of mining entrepreneurs which included George
Hearst, future father of William Randolph Hearst
the publishing magnate and James Ben Ali Haggin, for whom the prestigious Ben Ali Stakes
horse race is named.
02 June 2012
A year after acquiring the mine,
Hearst and his partners sold
shares in the Homestake Mining Company and listed it on the
New York Stock Exchange. Homestake would go on to become the
longest continuously-listed NYSE
stock in history until it finally merged with Barrick Gold in 2001.
The story of Homestake Mining has been on
my mind a lot lately as I have watched precious
metal mining stocks get decimated over the past
6 months - reaching levels that they haven’t witnessed since the very depths of 2008 - when
gold was trading a little below $800. It’s hard to
get away from gold these days as the bears rejoice in gold’s ‘demise’ whilst the bulls rationalize a healthy correction in an ongoing bull market, but the one thing everybody who follows
gold is confused about is the performance of the
mining stocks.
A look at the NYSE Arca Gold BUGS (HUI) index
(anecdotally, the BUGS in the name of this particular index, for those who aren’t familiar with
it, stands for Basket of Unhedged Gold Stocks)
as a proxy for the mining sector shows just how
extraordinary the collapse in the mining sector
has been (chart, top, next page). The senior gold
miners, as a group, lost over 40% from their September peak when gold hit $1900 to their recent
trough against a comparative fall of only 15% in
the underlying commodity which, even by the
standards previously set by this particularly skittish group, is quite something.
If we overlay the gold price and add the junior
miners we find that, not only have the juniors
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3.
I have spoken at length previously in these
pages about the dangers of listening to the
wrong voices when seeking commentary
on gold but for the benefit of anyone who
missed that, here are the dos and don’ts of
the gold space:
DO listen to:
Eric Sprott, Richard Russell, Jim Sinclair, Bill
Murphy, James Turk, Harvey Organ, John
Embry, Pierre Lassonde, Ben Davies, Egon
von Greyerz, Rick Rule, Marc Faber, John
Hatthaway and Bill Fleckenstein (amongst
others)
SOURCE: BLOOMBERG
(perhaps understandably) underperformed further still, but that, as a group, they managed to
lose over half of their value in the same period
(chart, below).
Do NOT listen to:
Warren Buffett, Charlie Munger, Bill Gates, Jim
Cramer, Jon Nadler, anyone speaking on CNBC
about gold whose name does not appear on the
list above, your broker (unless he has heard of
AT LEAST 50% of the names on the list of
‘Dos’), the FT, the Wall Street Journal and
(sorry Dennis) Dennis Gartman.
There are many commentators who have
been right about gold for 12 straight years
and there are many who have arrived at
the party late and proceeded to apply the
wrong metrics to gold when attempting
to predict its future movements. My advice? Listen to the former and ignore the
latter. But I digress...
Let’s get back to Homestake Mining, shall
we? Specifically, its performance during
The Great Depression.
SOURCE: BLOOMBERG
Now, for many latecomers to the world of gold
mining stocks, these moves have been enough
to send buyers scurrying for cover, vowing never
to touch these stocks again. As gold hit $1,900
last year, hot money that wanted nothing to do
with gold at $800, thought it was expensive at
$1,200 and were convinced that the gold ‘bubble’ had burst at $1,500, flocked to the yellow
metal in sure and certain hope of a bonanza. But
a funny thing happened on the way to the ore...
um...the price of gold corrected. Fast.
02 June 2012
By 1930, Homestake
Mining had been paying continuous dividends
for 50 years but during the period 1929-1935,
when the US stock market was in a tailspin as
Depression gripped the world, Homestake’s
performance was nothing short of staggering—its share price (particularly in 1930, 1931
and 1932—before Roosevelt’s Executive Order
6102 confiscated gold from US citizens) soaring as the Dow Jones nosedived. In that six-year
period, as the price of Homestake’s shares leapt
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Homestake Mining vs Dow Jones Industrial Average
Percentage Performance
1928 - 1949
+700%
+600%
Homestake Mining Co.
Dow Jones Industrial Average
+500%
+400%
+300%
+200%
+100%
0
-100%
49
48
19
47
19
the US on a gold standard, the price of gold
traded in an incredibly narrow range between
$20.69 and $20.63 and it was this stability which
surely drove many into the welcoming arms of
46
Between 1924 and 1930, with
19
45
Now, when this discussion arises, many people
like to point out the fact that the official price of
gold in US dollars at that time was fixed, and that
surely this helped drive investment dollars into
gold mining shares as it limited the downside in
the price of the metal and there is a lot of merit
in that argument —after all, who WOULDN’T
feel happy investing in mining shares if they
knew for certain that the price of gold would
not go down? Unfortunately, where the price of
anything is ‘fixed’ by certain parties, that ‘fixing’
can go in both directions and that is exactly what
happened in the late-1920s/early-1930s.
02 June 2012
19
44
19
43
19
42
19
41
19
40
19
39
19
38
19
37
19
36
19
35
19
34
19
33
19
32
19
31
19
30
19
29
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28
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19
almost 600%, it was accompanied by similar performance in both earnings AND the company’s
dividend payout—the former going from $4.16
in 1929 to $32.43 in 1935 (that’s compound EPS
growth of 41% annually) while the latter, by the
time 1935 rolled around, had jumped from $7 in
1920 to $56 by 1935 as the company continued
to pay out 8-10% of its earnings as a dividend.
4.
gold mining shares as the world
around them began to implode.
But then came 1931 and, with
deleveraging and deflation the
order of the day, the gold ‘price’
fell from an average of $20.65 in
1930 to an average of $17.05 in
1931—a decline of almost 20%
in a year.
As you can see from the chart
(left), during that time the price
of Homestake Mining almost
doubled as the Dow Jones Industrial Average lost around 90% of
its value and it kept on rising the
following year as gold recovered
all its losses and added a few extra pennies for good measure—
averaging $20.69 in 1932 while
the Dow continued to languish.
As 1932 turned into 1933, there was a whiff of
panic in the air and so it was, on April 5th, 1933,
that President Roosevelt issued Executive Order 6102 “forbidding the Hoarding of Gold Coin,
Gold Bullion, and Gold Certificates within the
continental United States” and forcing holders
to sell their gold to the government at the mandated price of $20.67 ($371 in today’s dollars):
(Wikipedia): Executive Order 6102 required
all persons to deliver on or before May 1,
1933, all but a small amount of gold coin,
gold bullion, and gold certificates owned by
them to the Federal Reserve, in exchange for
$20.67 per troy ounce. Under the Trading
With the Enemy Act of 1917, as amended by
the recently passed Emergency Banking Act
of March 9, 1933, violation of the order was
punishable by fine up to $10,000 ($167,700 if
adjusted for inflation as of 2010) or up to ten
years in prison, or both. Most citizens who
owned large amounts of gold had it transferred to countries such as Switzerland.
Order 6102 specifically exempted “customary
use in industry, profession or art”—a provision that covered artists, jewellers, dentists,
and sign makers among others. The order
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further permitted any person to own up to
$100 in gold coins (a face value equivalent to
5 troy ounces (160 g) of Gold valued at about
$7800 as of 2011). The same paragraph also
exempted “gold coins having recognized special value to collectors of rare and unusual
coins.” This protected gold coin collections
from legal seizure and likely melting.
And that’s how these things tend to go, folks.
The twist, however, came immediately after the
enactment of Executive Order 6102:
The price of gold from the Treasury for international transactions was thereafter raised
to $35 an ounce ($587 in 2010 dollars). The
resulting profit that the government realized
funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.
The ‘resulting profit that the government realized’ could have been worded in another way, so
let’s run it through Google Translate and convert
it from Officialese into Realitish:
‘the resultant 40% overnight devaluation of the
dollar’
So what did this 40% devaluation in the price of
the dollar do to gold mining shares? Well, using
Homestake Mining as our proxy again, we can
see from the chart on the previous page that ,
at the time of the confiscation, it was up roughly
400% in value over the previous five years, but
from there it climbed relentlessly higher as the
price of gold was revalued upwards, increasing
its profits by around 50% almost overnight—
peaking around 600% higher mid-1938 than it
had been ten years prior, with the Dow Jones still
floundering 50% below its 1928 level.
So, gold miners proved to be an acutely smart
investment through the Great Depression, completely disavowing the notion that owning such
stocks in a deflationary environment was a foolish way to invest one’s money.
The performance of gold and the mining stocks
during the inflationary vortex of the 1970s is far
fresher in the collective memory and, seemingly,
far easier for the average investor to get their
head around—likely because a rising tide floats
all boats so people have a far easier time getting
their heads around rising prices being good for
this particular corner of the investment universe.
So now let’s fast-forward to 2012 and take a look
at the current state of the world and, in particular, gold and gold-mining stocks
Since its ‘peak’
The Great
Depression
$2,000
The Great
Recession
$1,500
1933
FDR Revalues
Gold At $35
1968
Gold ‘Free Float’
Market Established
5.
1973
Nixon Revalues
Gold At $42.22
$1,000
at $1,900 in September of 2011, gold has undergone
a correction of perfectly healthy
proportions—roughly 18% to the
recent low print of $1,539—and is
in the process of building a base before it makes another move higher.
(NB I began writing this piece on
Thursday BEFORE gold’s stunning
breakout performance on Friday after the disappointing US data)
Why the certainty? Let’s recap just a
couple of the factors that affect the
price of gold (and by extension the
mining stocks) and try to make an
assessment of the situation.
$500
$0
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
02 June 2012
2011
Any attempt to figure out the
likely movement of the gold price
should begin with the actions of the
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world’s central banks as they are both the biggest holders of gold and tend to move largely in
lockstep in long, trending motions. Some would
say that they also have both the most to lose by
a strengthening gold price as well as the means
with which to drive the price lower but that is
a discussion for another day. What IS certain,
is that central banks are, generally speaking, all
buyers or all sellers at the same time and, once
they set a course in one direction, they tend to
stay that course for decades.
had overwhelmed the market and drove gold to
its low of $252. The Washington Agreement stipulated that signatories could sell a maximum of
400 tonnes between them over the next 5 years.
It was re-signed again in 2004 and again in 2009.
In fact, central bank gold holdings slid continuously from around 1974 through the tail end of
2009 (chart, bottom left) as the need for gold diminished (at least in the eyes of the stewards of
global finances whose judgement is being shown
to be less than prudent in many cases). Coincidentally, the selling of gold holdings accelerated
right around the time the gold price hit its na-
September 1999 saw
the
signing of the Washington
Agreement on Gold which
was intended to set limits on
the amount of central bank
gold that could be sold into
the market in a given 5-year
period. It was precipitated
by the extraordinary decision
by Britain’s then-Chancellor
of the Exchequer, Gordon
Brown, to announce to the
market that he would be selling roughly 60% of Great Britain’s gold holdings through a
series of public auctions as
well as simultaneous sales by
the SNB, The Netherlands, Austria and proposed
sales by the IMF. Central bank selling pressure
SOURCE: WGC
dir in 1999. Against every seller, however, there
stands a buyer so the gold being disposed of by
the central banks was simply finding its way into
private hands—smart money, if you will—
as ETF and private bullion holdings climbed
aggressively (chart, above).
1,350
Central Bank Gold Holdings
1965 - 2010 (oz mm)
1,300
1,250
1,200
1,150
1,100
1,050
1,000
950
900
1965
1970
1975
1980
1985
1990
1995
2000
2005
6.
2010
It will hardly cause the sharpest collective
intake of breath amongst readers when
I point out that, by the time the Chinese
central bank announced in late 2009 that
their gold holdings (which had remained
unpublished for several years) had doubled
to 1,054 tons, the juggernaut had turned
and central banks had become net buyers
of gold for the first time in almost 40 years.
That pattern has continued—despite plenty
of rhetoric to the contrary from these august institutions—and it WILL continue for
many years to come while the world unrav-
SOURCE: TTMYGH
02 June 2012
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els the Gordian Knot of debt with which it has
bound itself over the last thirty years—as the
latest report from the World Gold Council highlighted this month:
(Sharps Pixley): Mexico, Kazakhstan and
Ukraine added about 204,000 ounces in
April. The Philippines added a whopping
1.033 million ounces in March with gold now
at 13.6% of its total reserves. UBS highlighted
the Philippines’ gold purchase is significant
as this is the second largest monthly Central Bank’s purchase after Mexico’s purchase
of 2.5 million ounces in March 2011. World
Gold Council (WGC) reported that central
bank purchases were 80.8 tonnes in Q1 2012
or around 7% of global gold demand. What
is more interesting is that WGC is now confident that central banks will continue to buy
gold and has added official sector purchases as a new element of gold demand while
eliminating official sector sales as a negative
supply factor.
The other key driving factor is investment demand and, as we highlighted above, traditionally
this source of demand has been the other side
of the equation to central bank selling—now the
two are aligned and that spells higher gold prices
7.
(WGC): The value measure of gold demand
was 16% higher year-on-year at US$59.7bln,
11% below the record from Q3 2011 of
US$67.1bln. The average gold price of
US$1,690.57 was 22% higher than the average of Q1 2011. In value terms, virtually all
sectors of gold demand posted year-on-year
increases, with the exception of physical bar
demand, which was broadly flat, and the official sector, where purchasing activity was
below Q1 2011’s exceptional levels.
Investment demand was the only sector
of the gold market to register year-on-year
growth in the first quarter, which was led by
solid demand for ETFs and similar products.
So, with that as a background, let’s take a look
at gold mining shares and the extraordinary value they appear to offer at these levels after six
months of fear and loathing.
Whilst I was writing this piece, the chart below
hit my inbox from Wesley Legrand in Australia
and it highlights beautifully just how oversold
the gold mining shares have become.
Originally culled from a piece by James Turk, it
seems only fair to let James do the talking:
(James Turk): “I want readers to take a look
at the following 30 year chart (see
below), which I believe is the most
important and extraordinary chart
for 2012. It presents the XAU Gold
Mining Index measured in terms
of gold, not dollars. We’re making history here. Gold stocks have
never been this undervalued before.
We’ve had a 12 year bull market in
gold, but we’ve also had a 15 year
bear market in the mining shares
that began with the Bre-X collapse.
It’s very rare in market history to
see an outlier like this. This is an extraordinary event. Years from now
we are going to look back and shake
our heads in disbelief at how undervalued gold stocks were in 2012.”
SOURCE: JAMES TURK
02 June 2012
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This chart shows that, despite rebounding after
2008’s decimation, mining shares, when priced
in ounces of gold have hit new and unprecedented lows.
But in case you think I’m cherrypicking, a matter of a couple of hours later, Nick Laird of the
8.
Newmont Mining currently trades near a 52week low and has a dividend of just over 3%.
Newmont’s dividend is indexed each quarter
to the average price of the gold it sells in that
quarter with step-up provisions of a further 7.5c
if the average gold price exceeds $1,700 in a
given quarter and a further 2.5c
should those sales average in excess of $2,000. The company has a
cash cost of gold mined of around
$650/oz and is working hard to
lower that figure. Analysts figure
that earnings will hit an all-time
high this year of close to $5 per
share. The P/E ratio? That would
be 11x. The same metric in 2008?
30x.
Newmont Mining is currently
trading roughly $20, or 40% below
the average analyst target price of
$67.23 with a yield 50% higher
than that of the S&P500 and a P/E
ratio 30% lower, while its priceto-book ratio, at 1.8x, is also extremely close to the 2008 lows
If we revisit the performance of
NEM, GDX and GDXJ when priced
SOURCE: SHARELYNX
in ounces of gold, it becomes apwonderful Sharelynx website (one of THE best
parent just how beaten up this particular sector
resources for gold and silver charts on the web),
has become.
sent me this chart
(above) of the Barron’s
Gold Mining Index vs
gold and the similarity
is eerie:
To illustrate the point
further, I am going to
use a specific stock,
Newmont
Mining
(NEM) as an example
along with the ETFs
that follow the senior
and junior miners (and,
at this point, I should
disclose that the Vulpes
Testudo Fund has a
long position in NEM).
SOURCE: BLOOMBERG
02 June 2012
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NEM and GDX are at levels comparable to the
very depths of 2008 (chart, previous page) and,
when comparing the state of the world now versus then, it is incredibly difficult to understand
just why that would be.
Remember, in the Autumn of 2008, panic was
at its zenith and good stocks were being thrown
out along with bad as deleveraging took hold of
the world.
Since then, a number of key metrics that directly affect the price of gold and gold miners
have changed so it makes sense to see where we
stand:
Sep 2008
Gold Price
May 2012
There may well be a period of deflation or deleveraging prior to inflation taking hold, but with
inflation the central bankers’ firehose of choice,
we can be fairly certain that inflation is in our future and inflationary environments are good for
gold. As for the period of deflation/deleveraging
which we are seeing now, using the greatest deflationary period in history as our example would
seem to suggest that gold stocks will perform extremely well under those conditions also.
The fact that gold stocks are behaving so poorly
seems to be as a result of both misunderstanding and inadequate knowledge of history on the
part of the vast majority of investors and, as
we have seen with subprime,
Greece, Spain, Italy and, one
Change
day, Japan, the UK and the US,
+80%
nothing matters to anybody un+30%
til it matters to everybody.
$870.95
$1,564
$480/oz
$640/oz
Fed Balance Sheet ($trln)
$0.943
$2.86
+300%
ECB Balance Sheet (€trln)
€1.50
€3.02
+100%
Real Rates (US$ 5yr)
2.01%
-1.22%
US Govt. Bailout Commitments (CNN)
$29bln
$11trln
Average Cash Cost/oz (ABN est.)
Now, with that as a backdrop, and with the understanding that, as we approach the endgame
for Europe, the choice facing those empowered
to make decisions about how it ultimately plays
out is actually a fairly simple one—allow massive, widespread sovereign defaults and a continent-wide bank-run or print unlimited amounts
of Euros—is anyone still confused about how
this will all play out?
Europe’s ‘leaders’ will NOT arbitrarily choose to
inflict the pain necessary to deal with the current debt crisis when they have the means to
print free money at their disposal and the only
impediment to doing so is an as-yet undetermined percentage of 81 million German citizens.
If Germany has to leave the EU in order for the
moneyprinting to happen, then mark my words,
they will leave—either because they choose to
or because the ‘Latin-bloc’ (which now includes
France) force them to. Either way, the end will
come in a shower of confetti paper money.
02 June 2012
9.
When the need
for gold as protection dawns on
everybody, they will realise that
+$10.99trln
owning it through gold mining
stocks will provide tremendous
upside
gearing—particularly
from these bombed-out levels—and, with gold
making up such a tiny percentage of global financial assets (the bulk of the increase over the last
ten years has been due to price appreciation), it
will become a race to own ounces of gold in the
ground.
-323bp
The recent (April) Thomson Reuters GFMS survey laid things out perfectly:
(UK Daily Telegraph): Rising fears about
[Spain] will send a fresh flood of investment
towards the “safe haven” metal, according
to the annual report from Thomson Reuters
GFMS.
Philip Klapwijk, global head of metals analytics at the consultancy, said: “We could easily see last September’s record high [a closing high of $1,900.23 on September 5] being
taken out.
“A push on towards $2,000 is definitely on
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10.
10
9
everybody at the same time..... look out!
8
Gold As % Of Global
Financial Assets
1968 - 2010
7
6
%
5
4
3
2
1
0
Now, as I explained earlier, I began writing this piece earlier this week in between
shifts driving a taxi for my daughters and,
last night, in the wake of appalling US payroll data, gold finally busted loose - taking
the gold stocks with it as the NYSE Gold
BUGS Index added 7%.
This may or may not be the dawning of a
collective realization (we have seen many
false examples), but, if the deteriorating
data leads to the inevitable appearance of
QE3 (and it’s hard to see how the Fed, in an
SOURCE: TTMYGH
election year, could take any action AFTER
the cards before the year is out, although a
June’s meeting) the price of gold (and with it, the
clear breach of that mark is arguably a more
price of mining shares) will head for new highs
likely event for the first half of next year.”
once again.
Demand for gold often sees a boost when
Count on it.
fears about the situation in Europe intenBut I will leave you this week with the words
sify. The metal can likewise benefit from the
of a gentleman for whom I have a tremendous
prospect of more quantitative easing (QE),
amount of admiration, Raoul Pal.
as investors seek to protect their wealth from
the inflationary effects of central bankers’ acIn a recent presentation entitled The End Game,
tions.
Mr. Pal had the following to say about the next
stage of the crisis:
The potential pitfalls? Well, they lay them out
too:
We don’t know exactly what is to come, but
we can all join the very few dots from where
In the shorter term, GFMS thinks the apparwe are now, to the collapse of the first major
ent abatement of the eurozone crisis and rebank…
duced expectations for a third round of quantitative easing or “QE3” in the US could drive
With very limited room for government bailthe gold price lower, perhaps below $1,550 in
outs, we can very easily join the next dots
the next couple of months.
from the first bank closure to the collapse
of the whole European banking system, and
Anybody see an abatement in the Eurozone crithen to the bankruptcy of the governments
sis? Less chance of QE3 after this week’s GDP
themselves.
revision and the weakening jobs market in the
USA?
There are almost no brakes in the system to
stop this, and almost no-one realises the seriMe neither.
ousness of the situation.
Gold stocks offer tremendous value and, while
Got Gold (miners)?
it is perfectly possible that they could get even
cheaper in the next few months if fear leads to
panic which in turn leads to indiscriminate selling, at some point they will be appreciated for
a recap of what’s in
the value they offer and, if like everything else
store for you this week so dive in, folks...
in the last few years, that realization dawns on
1968 1980 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
************
No space for
02 June 2012
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Contents
11.
02 June 2012
Did We See A Bottom In Gold Today?
All Eyes Turn To The Policy Makers
Wall Street Food Chain
The End Of The Euro: A Survivor’s Guide
Spain Faces ‘Total Emergency’ As Fear Grips Markets
Wall Street Journal Says Comex Has Been Classified As ‘Too Big To Fail’
Eurozone Is ‘Unsustainable’ Warns Mario Draghi
China To Restart Nuclear Power Programme
The Fear Factor: Preventing A Big European Bank Run
A Gold Anchor Standard?
Alexis Tsipras Is the Greek Who Makes Europe Tremble
Charts That Make You Go Hmmm.....
Words That Make You Go Hmmm.....
And Finally.....
02 June 2012
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THINGS THAT MAKE YOU GO
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Quite a few
of the uncivilized entered the markets today, and sparked a rally in
gold and silver in what appeared to be an obvious ‘flight to safety’ and also a powerful relief
rally after the awful pounding the metals and the
miners had taken into the Comex expiries and
delivery dates.
Some of the dividend paying gold and silver
stocks had impressive gains even moreso than
the metal, with at least one royalty trust up 11
percent or so. Yes I flipped one from yesterday,
and even trimmed my entirely outsized bullion
positions bought on the dips back to something a
little more ‘normal’ and comfortable. Of course I
never touch my long term holdings in place since
2000. It is not raining nearly hard enough yet.
During hard times a solid dividend paying miner
is hard to beat, unless you get lucky with one
of those lottery tickets known as junior miners.
When the right time comes I hope to be there.
But for now I will play it a bit more safe. I see
more potential downside in stocks until the
banks step up and print it up harder. No telling
how well they will fare against the splash from
across the sea.
After a triple spiked test of support, the gold
market went vertical today, marking perhaps
12.
what might be regarded by some of the more
astute as a well-rounded bottom. I live for days
like today. Much of this was due to a reversal
of the sheer manipulation for short term gains,
that broke in the face of the unfolding global currency crisis. Bam!
Never underestimate the power of the CFTC to
stand idly by while the markets, taken in hand by
the titans of Wall Street, degenerate into something that resembles a round of golf at the Piedmont Driving Club, or an impromptu fight club
meeting at the New York Athletic Club.
Well, boys will be boys, in proportion to their
toys.
Chart-wise follow through is everything. Yes we
have a short term rounded bottom, and the potential for much larger formations including a
broad cup and handle the likes of which we have
not seen in quite some time. But do not underestimate the baseness of desperate men accustomed to having their way.
But first things first. We must see if gold can
break the intermediate downtrend and then
establish at least a broad trading range, which
will form the lid of the potential cup. It could
happen in a rush, given some exogenous trigger
event and the right convergence of circumstances, but I suspect it will be a long and arduous
climb, fought in stages and levels.
Chart porn-wise, the cup and handle, should it
work, would take gold well over $2,000 by year
end or so, and probably set up a new leg into
the 3’s.
But that now is all speculation. Time to do the
hard climbing work for now, one day at a time.
O O O
JESSES CAFE AMERICAIN / LINK
The eurozone crisis
has
moved in definite cycles. Markets deteriorate,
policy makers to take action; markets rally, policy
makers relax – only for the turmoil to resume as
confidence ebbs away again.
After a week in which Spain’s borrowing costs
SOURCE: JESSE
02 June 2012
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approached euro-era highs, US bond yields sank
to record lows, equities tumbled and the euro
suffered sharp swings, some strategists think
2012 is looking like a rerun of 2011.
This time, it
is Spain moving closer to a
bailout, rather than Italy,
while a strong
result for the
far-left in Greece’s repeat elections this month
could push Athens towards a euro exit. The market turmoil has focused attention on a possible
response from governments and central banks.
“... It feels that we’ve now moved into
the ‘intervention zone’ where all
paths lead to the next major round of
action from the authorities”
“It feels that we’ve now moved into the ‘intervention zone’ where all paths lead to the next
major round of action from the authorities. It’s
difficult to see how the market regains its poise
without it,” says Jim Reid, a senior strategist at
Deutsche Bank. “The authorities can’t afford to
get this wrong or we will likely have another crisis on our hands.”
The range of possibilities is wide, though there is
no sign yet that action will be taken. Short-term
measures include a rate cut by the European
Central Bank, which holds its next rate-setting
meeting next week, a resumption of government bond-buying under its securities market
programme and another round of ultra-cheap
ECB loans for banks.
Some are looking for political progress on a
pan-European deposit guarantee, bank recapitalisations, government investment to stimulate
growth and, potentially, a banking licence for the
European Stability Mechanism, Europe’s permanent bailout fund, to boost its firepower.
Hard decisions are unlikely before the Greek
election on June 17, but this week’s volatility has
sparked speculation the ECB could act sooner.
One possibility could be to restart the SMP to
stem the rise in Spain’s borrowing costs. “They
could blow the cobwebs off the SMP,” says a senior government bond trader. “It’s the only thing
they can do to calm things down in the short
02 June 2012
13.
term.”
But the ECB is unlikely to resume bond-buying
unless the difference between Spanish and German benchmark 10-year yields widens further. It
is now at 535 basis points, and Pavan Wadhwa,
global fixed-income strategist at JPMorgan, estimates the spread would have to climb another
25-50 basis points before the SMP could be reactivated.
Interest rate cuts are not expected at next
week’s ECB meeting, nor for now is another dose
of cheap three-year money under the central
bank’s longer-term refinancing operation, or
LTRO.
Most economists surveyed by Bloomberg believe the ECB will keep its policy rate on hold at
1 per cent. Jonathan Loynes of Capital Economics expects Mario Draghi, ECB president, to hold
open the prospect of further banking assistance
should the threat of a funding crisis become
acute, but says he is unlikely to announce any
measures at Wednesday’s meeting.
Investors and analysts are pessimistic that politicians will make meaningful headway in other areas, such as a pan-European deposit guarantee,
an ESM bank licence or capital injections into
Spanish banks.
O O O
FT / LINK
The global monetary system
which has evolved and morphed over the past
century but always in the direction of easier,
cheaper and more abundant credit, may have
reached a point at which it can no longer operate
efficiently and equitably to promote economic
growth and the fair distribution of its benefits.
Future changes, which lie on a visible horizon,
may not be so beneficial for our ocean’s oversized creatures.
The balance between financial whales and plankton – powerful creditors and much smaller debtors – is significantly dependent on the successful functioning of our global monetary system.
What is a global monetary system? It is basically
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how the world conducts and pays for commerce.
Historically, several different systems have been
employed but basically they have either been
commodity-based systems – gold and silver primarily – or a fiat system – paper money…
The global monetary system seemed to be working smoothly, and instead of Shamu, it was labeled the “great moderation.” The laws of natural selection and modern day finance seemed to
be functioning as anticipated, and the whales
were ascendant.
14.
either perceive too much risk or refuse to accept
near zero-based returns on their investments.
As they question the value of much of the $200
trillion which comprises our current system, they
move marginally elsewhere – to real assets such
as land, gold and tangible things, or to cash and
a figurative mattress where at least their money
is readily accessible.
O O O
BILL GROSS / LINK
In every economic crisis
there comes a moment of clarity. In Europe soon, millions of people will wake up
to realize that the euro-as-we-know-it is
gone. Economic chaos awaits them.
SOURCE: BILL GROSS/BLOOMBERG
Functioning yes, but perhaps not so moderately
or smoothly – especially since 2008. Policy responses by fiscal and monetary authorities have
managed to prevent substantial haircutting of
the $200 trillion or so of financial assets that
comprise our global monetary system, yet in the
process have increased the risk and lowered the
return of sovereign securities which represent its
core…
Now, however, with even the United States suffering a credit downgrade to AA+ and offering
negative 200 basis point real policy rates for the
privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors
– to support the existing system may soon descend. Such a transition occurs because lenders
02 June 2012
To understand why, first strip away your illusions. Europe’s crisis to date is a series of
supposedly “decisive” turning points that
each turned out to be just another step
down a steep hill. Greece’s upcoming election on June 17 is another such moment.
While the so-called “pro-bailout” forces
may prevail in terms of parliamentary seats,
some form of new currency will soon flood
the streets of Athens. It is already nearly
impossible to save Greek membership in
the euro area: depositors flee banks, taxpayers delay tax payments, and companies
postpone paying their suppliers – either
because they can’t pay or because they expect
soon to be able to pay in cheap drachma.
The troika of the European Commission (EC),
European Central Bank (ECB), and International
Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any
new lending program would run into the same
difficulties. In apparent frustration, the head of
the IMF, Christine Lagarde, remarked last week,
“As far as Athens is concerned, I also think about
all those people who are trying to escape tax all
the time.”
Ms. Lagarde’s empathy is wearing thin and this
is unfortunate – particularly as the Greek failure
mostly demonstrates how wrong a single currency is for Europe. The Greek backlash reflects
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the enormous pain and difficulty that comes
with trying to arrange “internal devaluations” (a
euphemism for big wage and spending cuts) in
order to restore competitiveness and repay an
excessive debt level.
Faced with five years of recession, more than 20
percent unemployment, further cuts to come,
and a stream of failed promises from politicians
inside and outside the country, a political backlash seems only natural. With IMF leaders, EC officials, and financial journalists floating the idea
of a “Greek exit” from the euro, who can now
invest in or sign long-term contracts in Greece?
Greece’s economy can only get worse.
Some
European
politicians are now
telling us that an orderly exit for Greece
is feasible under
current conditions,
and Greece will be
the only nation that
leaves.
They are
wrong. Greece’s exit is simply another step in a
chain of events that leads towards a chaotic dissolution of the euro zone.
“...Some European politicians are
now telling us that an orderly
exit for Greece is feasible under
current conditions, and Greece
will be the only nation that
leaves. They are wrong.”
During the next stage of the crisis, Europe’s electorate will be rudely awakened to the large financial risks which have been foisted upon them
in failed attempts to keep the single currency
alive. If Greece quits the euro later this year, its
government will default on approximately 300
billion euros of external public debt, including
roughly 187 billion euros owed to the IMF and
European Financial Stability Facility (EFSF).
O O O
SIMON JOHNSON / LINK
Spain is facing
the gravest danger
since the end of the Franco dictatorship as the
country is frozen out of global capital markets
and slides towards an epic showdown with Europe.
“We’re in a situation of total emergency, the
worst crisis we have ever lived through” said
ex-premier Felipe Gonzalez, the country’s elder
statesman.
02 June 2012
15.
The warning came as the yields on Spanish 10year bonds spiked to 6.7pc, pushing the “risk
premium” over German Bunds to a post-euro
high of 540 basis points. The IBEX index of stocks
in Madrid fell 2.6pc, the lowest since the dotcom
bust in 2003.
Chaos over the €23.5bn rescue of crippled lender Bankia has led to the abrupt resignation of
central bank governor Miguel Ángel Fernández
Ordóñez, who testified to the senate that he had
been muzzled to avoid enflaming events as confidence in the country drains away.
Markets are on tenterhooks as Spanish yields
test levels that forced the European Central Bank
to respond last November with its €1 trillion liquidity blitz. “Nobody is short Spanish debt right
now because they are expecting ECB intervention,” said Andrew Roberts, credit chief at RBS.
“If it doesn’t come -- if we take out 6.8pc -- we’re
going to see a hyberbolic sell-off,” he said.
Italy felt the full brunt of contagion from Spain on
Wednesday, with 10-year yileds back near 6pc.
The euro fell to a 2-year low of $1.239 against
the dollar. Crude oil and metal prices plummeted and save-haven flight pushed rates on 2-year
German debt to zero. Gilt yields fell to 1.64pc,
the lowest in history.
Mr Roberts said the collapse in Spanish tax revenues is replicating the pattern in Greece. Fiscal
revenues have fallen 4.8pc over the last year,
and VAT returns have slumped 14.6pc. Debt service costs have risen by 18pc.
The country is caught in a classic deflationary
vice: a rising debt burden on a shrinking economic base. “Once you get into such a negative
feedback loop, you can move beyond the point
of no return quickly,” he said.
The European Commission has softened its
stance, giving Madrid an extra year until 2014 to
cuts its budget deficit from 8.9pc to 3pc of GDP,
though this still amounts to a fiscal shock. Brussels told premier Mariano Rajoy to widen the
VAT base and speed retirement at 67.
There is no sign so far that the ECB is ready to
relent as Frankfurt and Madrid cross swords in
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an escalting test of will. The ECB has scotched Mr
Rajoy’s tentative plans to recapitalize Bankia by
drawing on ECB funds.
“It is dangerous to play chicken when you are
driving a Seat and the ECB is driving a tank,” said
professor Luis Garicano from the London School
of Economics (LSE).
O O O
UK DAILY TELEGRAPH / LINK
President Obama’s standard gripe is that the economy has performed so poorly during his term because of
the financial crisis he inherited from George W.
Bush. But this week it is Mr. Obama who has bequeathed to his successors a landmark in financial regulation. It is bound to haunt them, though
not as much as it will haunt taxpayers.
J.P. Morgan’s recent trading loss and the resulting Washington blather about tighter regulation
have grabbed headlines.
Little noticed is that on Tuesday Team Obama
took its first formal steps toward putting taxpayers behind Wall Street derivatives trading -- not
behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes,
the same crew that rails against the dangers of
derivatives is quietly positioning these financial
instruments directly above the taxpayer safety
net.
“... The Financial Stability Oversight
Council secretly voted to proceed
toward inducting several derivatives
clearinghouses into the too-big-tofail club. After further review, regulators will make final designations”
As we noted
in May 2010,
the authority for this
regulatory
achievement
was inserted
into
Congress’s pending financial reform bill by then-Senator Chris
Dodd. Two months later, the legislation was
re-named Dodd-Frank and signed into law by
Mr. Obama. One part of the law forces much of
the derivatives market into clearinghouses that
stand behind every trade. Mr. Dodd’s pet provision creates a mechanism for bailing out these
02 June 2012
16.
clearinghouses when they run into trouble.
Specifically, the law authorizes the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies. Traditionally the ability to borrow from the Fed’s
discount window was reserved for banks, but
the new law made clear that a clearinghouse
receiving assistance was not required to “be or
become a bank or bank holding company.” To get
help, they only needed to be deemed “systemically important” by the new Financial Stability
Oversight Council chaired by the Treasury Secretary.
Last year regulators finalized rules for how they
would use this new power. On Tuesday, they
began using it. The Financial Stability Oversight
Council secretly voted to proceed toward inducting several derivatives clearinghouses into the
too-big-to-fail club. After further review, regulators will make final designations, probably later
this year, and will announce publicly the names
of institutions deemed systemically important.
We’re told that the clearinghouses of Chicago’s
CME Group and Atlanta-based Intercontinental
Exchange were voted systemic this week, and
rumor has it that the council may even designate
London-based LCH.Clearnet as critical to the U.S.
financial system.
U.S. taxpayers thinking that they couldn’t possibly be forced to stand behind overseas derivatives trading will not be comforted by remarks
from Commodity Futures Trading Commission
Chairman Gary Gensler. On Monday he emphasized his determination to extend Dodd-Frank
derivatives regulation to overseas markets when
subsidiaries of U.S. firms are involved.
Readers know Mr. Gensler as the chief regulator of MF Global, which was run into bankruptcy
by his old Beltway and Goldman Sachs pal Jon
Corzine. An estimated $1.6 billion is still missing from MF Global customer accounts. What an
amazing feat Mr. Gensler will have performed if,
through his agency’s oversight, he can manage to
have U.S. customers eat the cost of Mr. Corzine’s
bets on foreign debt and have U.S. taxpayers un-
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derwrite bets in foreign derivatives trading.
If there’s one truth we’ve learned about government financial backstops, it’s that sooner or later they will be used. So eventually taxpayers will
have to bail out one derivatives clearinghouse
or another. It promises to be quite a mess. And
if the 45th president spends his first term whining about his predecessor’s mistakes, he’ll have
a point.
O O O
WSJ (VIA GATA) / LINK
The head of
the European Central
Bank hit out at the political paralysis gripping the
region as he warned the eurozone’s set-up was
“unsustainable”.
Mario Draghi said the central bank could not “fill
the vacuum” left by member states’ lack of action as it was claimed the zone is on the point of
“disintegration”.
Amid escalating talk of a potential bail-out for
Spain, the pres“...In a thinly disguised demand for ident of the
action from Germany, Mr Draghi ECB said the
central bank
said leaders had to decide whether was powerto stand by the current eurozone.
less to stop the
debt tornado.
“The sooner the vision is clarified
the better for the European Union,” “It’s not our
duty, it’s not in
he told the European Parliament.” our mandate”
to “fill the vacuum left by the lack of action by national governments on the fiscal front,” he said.
Christine Lagarde, the head of the International
Monetary Fund, last night denied that an IMF
bail-out of Spain was being prepared.
“There is no such plan. We have not received
any request to that effect and we are not doing
any work in relation to any financial support,”
she said, following a meeting with Spain’s deputy prime minister, Soraya Saenz de Santamaria.
Olli Rehn, the EU’s top economic official, called
for urgent action to “avoid a disintegration of the
eurozone.” The economic affairs commissioner
02 June 2012
17.
said that politicians had made progress but it
had been “uneven and seemingly inefficient.”...
Italy’s prime minister Mario Monti warned of the
“huge possibilities of contagion”. Ireland looked
set to approve the Fiscal Pact in its referendum
but in Greece the anti-austerity Syriza party took
the lead in some polls.
In a thinly disguised demand for action from
Germany, Mr Draghi said leaders had to decide
whether to stand by the current eurozone. “The
sooner the vision is clarified the better for the
European Union,” he told the European Parliament.
Pointing at the chaotic and ongoing rescue attempts of Bankia in Spain, Mr Draghi said the
handling of the raging bank crises was the “worst
possible way of doing things.”
He said politicians and regulators repeatedly underestimated the scale of their banks’ problems.
“This is the worst possible way of doing things,”
he said “Everyone ends up doing the right thing,
but at the highest cost.”
Data showed investor confidence draining from
the eurozone. Nearly €100bn of deposits was
withdrawn from Spain in the first three months
of the year.
O O O
UK DAILY TELEGRAPH / LINK
Beijing has indicated
that it
will lift its year-long moratorium on new nuclear
projects in a move that will breathe life into an
industry plagued by uncertainty since the disaster at Japan’s Fukushima Daiichi reactor last year.
China’s cabinet announced it had approved the
2020 nuclear strategy, finalised new safety standards and finished inspecting the country’s existing nuclear plants. After the Japanese nuclear
crisis China suspended approvals of new reactors while it conducted safety inspections and
drafted new regulations.
As the world’s largest energy user China is key
to setting the direction of future global nuclear
expansion. Beijing’s latest announcement marks
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a major step towards the full resumption of its
nuclear building programme, which accounts for
40 per cent of global reactors under construction
today.
“This is the
main hurdle,”
said Guo Shou,
energy analyst
at
Barclays.
“Approvals for
new
nuclear
reactors
are
around the corner, they are going to come very, very soon.”
“... Beijing’s latest announcement
marks a major step towards the full
resumption of its nuclear building
programme, which accounts for 40
per cent of global reactors under
construction today”
Restarting nuclear approvals will help boost
growth and create jobs in China’s nuclear sector at a time when Beijing is weighing options on
how to prevent a further slowdown in the economy, although the plans are not formally part of
any stimulus programme.
China draws most of its energy from burning coal
but Beijing is building up wind, solar, hydropower and nuclear power as it seeks to shift toward
non-fossil fuel sources. The country is targeting
60GW of nuclear capacity in 2020, according to
comments by Chinese officials, which would put
China’s reactor fleet on par with that of France.
In the aftermath of the Japanese nuclear crisis in March 2011, several European countries
abandoned or postponed plans for nuclear expansion. However many emerging economies,
including China, remained committed to nuclear
power and are setting the pace of global nuclear
growth.
China’s new safety regulations are expected to
provide a boost worldwide for the latest nuclear
technologies, especially for “third-generation”
reactors being built in China by Westinghouse of
the US and Areva of France.
Chinese nuclear companies are also trying to expand their presence overseas and have bid for
reactor contracts around the world.
“The combination of technical experience, operational experience and support that can come
02 June 2012
18.
out of China will make China a leader in the global nuclear industry,” said George Borovas, head
of the nuclear practice at global law firm Pillsbury. “We are starting to see it already. Chinese
companies are in the international marketplace
much more aggressively than they were one or
two years ago.”
O O O
FT.COM / LINK
In continental capitals and
bank boardrooms there is a common fear. It is
that the slow jog of deposits leaving banks in
Greece and, more recently, Spain, may turn into
a full-blown run that quickly spreads from bank
to bank, and then from country to country. There
have already been some warning signs, such as
a sudden acceleration of deposit outflows from
Greek banks in May.
A fierce debate is now taking place as to the best
way to avert a run that, if it started, might be difficult to contain and could lead to massive capital
flight from the euro zone’s peripheral countries,
which have €1.8 trillion ($2.2 trillion) in household deposits (see chart). Increasing numbers of
people think the answer is greater financial integration. On May 30th the European Commission said there ought to be “full economic and
monetary union, including a banking union; integrated financial supervision and a single deposit
guarantee scheme”.
The first step is to shore up confidence in the region’s banks by making sure they have enough
capital to withstand a crisis. It is far cheaper to
recapitalise banks, after all, than to stand behind
all of their deposits. Yet such efforts have been
bungled time and again. Europe has twice over
the past two years tried to reassure depositors
and investors that its banks are sound by subjecting them to “stress tests” that were supposed to
mimic an economic downturn. In each case the
tests were soon followed by revelations of deep
capital holes in some banks (newly nationalised
Bankia among them). Since some national regulators have lost the confidence of markets, they
are having to bring in outsiders to assess how
much capital their banks need.
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19.
as something quite profound is happening
that could propel gold to record new highs.
Yes, potentially the biggest thing since the
birth of the gold ETF and the liberalization of
the Chinese gold market in 2003. A decade
on and we have grounds for saying that gold
may well see a significant leg higher... the big
new thing in gold. I’ll explain...
SOURCE: ECONOMIST/CITI
Actually raising the capital is the next big problem for countries such as Spain or Italy, which
are already struggling to convince markets that
their public debt is sustainable. Ideally it should
come from the European Stability Mechanism
(ESM), Europe’s new bail-out fund, as a direct
capital injection into banks rather than as loans
to governments, which then use the money to
recapitalise their ailing lenders.
Injecting capital is politically difficult. Core countries such as Germany fret they will lose a lever
of influence over government policies in peripheral countries by handing over equity. They
also stand a greater chance of losing money if
the ESM takes on the risk of bank investing, not
least because they know even less about the
balance-sheets of individual lenders than those
of national governments. Peripheral countries
are less than keen on handing ownership of important banks to bureaucrats in Brussels. And
unless the capital is accompanied by supervisory
reforms, local regulators may encourage banks
to lend more freely at home since the risk of loss
will have been exported.
O O O
ECONOMIST / LINK
“Forgive the hyperbole
in
the headline but we wanted to get your attention
02 June 2012
Banking capital adequacy ratios, once the
domain of banking specialists are set to become center stage for the gold market as
well as the wider economy. In response to
the global banking crisis the rules are to be
tightened in terms of the assets that banks
must hold and this is potentially going to
very much favour gold. The Basel Committee for Bank Supervision (or BCBS) as part of
the BIS are arguably the highest authority in
banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules.
In short, they are meeting to consider making
gold a Tier 1 asset for commercial banks with
100% weighting rather than a Tier 3 asset with
just a 50% risk weighting as it does today. At the
same time they are set to increase the amount
of capital banks must set aside as well. A double
win potentially.
Hitherto banks have been much dis-incentivised
to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which
have fared too well in the crisis. With this potential change in capital adequacy requirements,
bank purchases of gold would drive up its value
relative to other high quality qualifying assets,
increasing its desirability for regulatory purposes
further. This should result in gold being re-priced
to bring it on a par with all other high quality assets.
Currently banks have to have core Tier 1 capital
ratio of 4% of which will rise to 6% from the beginning of next year. In addition to its store of
value merits, central to the argument in favour
of gold as a bank reserve is its countercyclical nature to most other assets in that it tends to be
19
THINGS THAT MAKE YOU GO
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inversely correlated. Gold is ideal as it bears no
credit risk, it involves no other counterparty and
it is no one’s liability. It is a reserve asset diversifier if you like.
This is a treble win for gold - it would be a major
endorsement of its role in preserving wealth and
as a store of value from the highest financial authority, it would lead to significant purchases of
gold by major financial institutions and it would
lead to a reappraisal of its value with respect
to other Tier 1 capital such as quality sovereign
debt. Under the new rules gold could become a
very significantly larger proportion of a reserve
pool which is about to grow very much larger.
The 2 questions that come to my mind are when
and how much metal - on timing Basel III kicks
in from January 2013 with a further tightening
in capital adequacy ratios in 2018. That said, it
is not yet clear when gold’s re-rating to Tier 1
might take place.
In terms of amount of gold that could be purchased that is harder still - if we thought that
say 2% of total current Tier 1 capital held by
commercial banks globally might be converted
into gold (forgetting for a moment about the
increases in capital yet to be seen) - this would
suggest that 2% of the $4,276,000,000,000
would be converted to gold. That is equivalent to
$85,000,000,000 in gold which at current market
prices is equivalent to 1,700 tonnes of gold.
Another way of looking at this is to consider that
commercial banks would be holding gold for precisely the same reason that central banks do and the largest 110 central banks in the world
have 16% of their reserves as gold - as such a
figure of just 2% is really quite a modest expectation - ultimately it will be a question of price and
expectations of price change that would determine the rate of uptake in the short term.
O O O
ROSS NORMAN / LINK
Just weeks ago, Alexis Tsipras, 37,
was an obscure opposition politician. Now, he’s
unnerving the powers that be in the European
Union because he and his leftist party Syriza — a
02 June 2012
20.
group whose membership ranges from hardline
Communists to moderate socialists — have the
potential of forming a government after the June
17 elections. A teenage member of the Communist Youth of Greece, Tsipras has executed
a dramatic and canny political metamorphosis,
transforming himself fromthe leader of a radical leftist coalition to a left-of-center standard
bearer for anti-bailout and anti-austerity populism. And in so doing, he has confounded the ossified poltiical class of Greece, which acceded to
the strictures imposed by the E.U. in order for
Athens to receive the funds it needs to satisfy
its creditors. Now, Tsipras may hold the future of
the euro and the E.U. in his hands. All he needs
to do is win enough seats to govern.
Tsipras spoke to TIME’s Joanna Kakissis at the
Syriza office on Koumoundourou Square in Athens. Following is the transcript of the interview:
TIME:
Are you willing to make
the necessary structural reforms
in Greece to revive the economy?
ALEXIS TSIPRAS:
It is obvious that Greece — and the Greek
economy — has its own particularities that played a role in making this economic crisis deeper
and longer. Indeed, we must
make structural reforms which
will the public sector more reliable, create an effective and fair
taxation system, and fight the
black economy which has been
like a kind of gangrene on the
Greek economy. As far as I know,
the underground economy represents 30% of the GDP.
At the same time, we will try to
restore faith in the law and convince people that the state is
equitable and effective. We will
destroy corruption and the interconnection of political and
economic power from its roots.
20
THINGS THAT MAKE YOU GO
Hmmm...
Without the contribution of the
citizens, these reforms cannot
take place. But in order to contribute, the citizens want to know
that these reforms will not be implemented only to those who have
low incomes but those who have
high incomes and come from the
upper class. There is a Greek saying: “The fish always stinks from
its head,” (which means, roughly,
corruption starts at the top). So if
we don’t fight the problem at its
roots, then we won’t be able to
establish positive morale that can
encourage all Greeks to also fight
against it.
But you need a long time to make
such reforms...
Some
things need time, but
some other can change quickly.
For instance, I can’t understand
why the last two and half years
we are chasing our tail when it
comes to taxation. We taxed poor
people again and again, but no
one talked about what we really
needed, which is an assets register by which every Greek will
be obliged to register their properties, their bank accounts in
Greece or abroad, as well as their
mobile assets, such as the shares
of a company they possibly have.
Only in this way, we will be able
to tax everyone according to their
real capability of paying taxes and
we will create a system which will
share the responsibilities in a fair
way. Of course, for these policies
to be effective, we should also
create a high-penalty system for
those who break the law. Whoever
02 June 2012
21.
makes a false statement about
his assets should be punished by
having a bit part of these assets
confiscated. There is no magical
way out of the crisis. However,
there are for sure solutions, tough
but fair, in order to share in a just
way the responsibilities, establish
a positive morale and give a boost
to the Greek economy.
There are some outside Greece
who say Greece wants it both
ways...
It’s
a paradox to think Greece
can stay in the euro zone if the
austerity policies continue to be
implemented. The austerity policy, and especially this extreme
policy based on the term “internal devaluation”, is exactly what
we should have avoided.
It’s the wrong prescription, the
wrong medicine for the patient,
because Greece has a production
base with a special characteristic: 90% of the small businesses’
production, which are the foundation of the Greek economy, is not
exported. It is sold on the domestic market. So, when you make a
horizontal cut of the wages and
the pensions, inevitably there is
an impact on the consumption.
Hence, 200,000 small Greek
businesses have closed down!...
O O O
TIME / INTERVIEW
21
CHARTS THAT MAKE YOU GO
Hmmm...
22.
In keeping with
this week’s gold-based theme,
this presentation from Business Insider entitled ‘The Truth
About Gold’ contains a series of
excellent charts that offer several perspectives on the yellow
metal...
CLICK TO VIEW PRESENTATION
SOURCE: BUSINESS INSIDER
A look at
a longterm chart of US 10-year
treasury yields offers stark
perspective
CLICK TO ENLARGE
02 June 2012
SOURCE: THE BIG PICTURE
22
CHARTS THAT MAKE YOU GO
Courtesy of my
Hmmm...
23.
SOURCE: RITHOLTZ/THE CHART STORE
friend Barry Ritholtz comes this great chart (above) that demonstrates
just how lackluster the employment recovery has been since January 2008—despite what the BLS
might have you believe...whilst below, Soc Gen’s Albert Edwards shows the severity of the decline in
labor force participation in the US along with what the real unemployment rate WOULD be had so
many not given up looking for work... not good.
SOURCE: BLS/SOC GEN
02 June 2012
23
CHARTS THAT MAKE YOU GO
Hmmm...
24.
Triggered by another ECRI commentary, Why Our Recession Call Stands, I’m now
focusing initially on the year-over-year
growth of the WLI rather than ECRI’s
previously favored, and rather arcane,
method of calculating the WLI growth
series from the underlying WLI (see
the endnote below). Specifically the
chart immediately below is the yearover-year change in the 4-week moving average of the WLI. The red dots
highlight the YoY value for the month
when recessions began.
SOURCE: DOUG SHORT
As the chart above makes clear, the
WLI YoY is currently at a lower level
than at the starting month for five of
the seven recessions during the published series. Of course, the same can
be said for its interim YoY trough in
2010. In any case, the behavior of this
indicator over the next quarter or so
will be especially interesting to watch.
A key argument in
ECRI’s latest reaffirmation of its recession
call is seen in the longterm pattern of yearover-year real personal
income (illustrated below, which I updated
with the latest PCE data
released this morning)...The commentary
includes explanations
for a couple of anomaSOURCE: DOUG SHORT
lies in this series, such
as the downward spike
in December 2004, which was the YoY oscillation from Microsoft’s one-time dividend payout 12
months earlier.
O O O
02 June 2012
DOUG SHORT / LINK
24
WORDS THAT MAKE YOU GO
Hmmm...
25.
Focusing back on
what could happen if the market were allowed to think for itself, Rick
Santelli & Gary Kaminski deface the edifice of central
banker largesse and blame it for the actual demise we
face - noting that it is now clear that whether it is QE
or actual rate easing, using jobs as the argument for
excessive intervention is a failed concept... they ask and
answer the question: “Have rates been too low for too
long?” and how those who played by the ‘rules’ continue to be the ones who are penalized.
CLICK TO WATCH
(via zerohedge)
He’s back and
he’s still angry.
What’s more, he’s still the only MEP prepared to speak the truth about Europe.
Nigel Farage (who will, I believe, one day be
seen as the lone voice in the wilderness that
he is) pleads for the breakup of the euro and
the restoration of human dignity... another
tour de force.
Incidentally, the quality of the question asked
by the Greek representative demonstrates
the level of understanding in the European
parliament
CLICK TO WATCH
On the subject of gold and mining stocks, I chatted with Geoff Candy
of Mineweb last week about those very subjects and, for those amongst you with
a few minutes to spare after wading through this week’s Things That Make You Go
Hmmm..... click on the mugshot (left) to hear that conversation...
02 June 2012
25
and finally…
For any non-Europeans
struggling with the concept that the Eurozone
could possibly split apart, this great video (courtesy of the good folks at ZeroHedge) shows that
this wouldn’t exactly be an unprecedented event in Europe’s history which has been spotty at
best.....
Hmmm…
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© THINGS THAT MAKE YOU GO HMMM..... 2012
02 June 2012
26
THINGS THAT MAKE YOU GO
Hmmm...
27.
Grant Williams
Grant Williams is a portfolio and strategy
advisor to Vulpes Investment Management in Singapore - a hedge fund running
$200million of largely partners’ capital
across multiple strategies.
In 2012, all Vulpes funds will be opened to
outside investors.
Grant has 26 years of experience in finance
on the Asian, Australian, European and US
markets and has held senior positions at
several international investment houses.
Grant has been writing ‘Things That Make You Go Hmmm.....’ for the last three years.
For more information on Vulpes please visit www.vulpesinvest.com
As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time-to-time,
the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm..... may
reflect the positioning of one or all of the Vulpes funds - though I will not be making any specific recommendations in this publication.
Grant
www.vulpesinvest.com
02 June 2012
27